Acceptable Gift Funds
The usage of gift funds as assets is fairly common in the mortgage industry. It may be that loan officers are seeing this more often in 2022 as increasing home prices and interest rates have pushed home affordability to the critical level. Let’s take a look at proper guidance that must be met for the usage of gift funds. By taking the time to double check this for acceptability, it could save valuable time and unnecessary headaches during the approval process.
For starters, what are gift funds? Gift funds are lump sums of money that are given to a borrower purchasing a primary or secondary home that may help to fund part of the down payment, closing costs, or financial reserves (USDA does not allow for financial reserves to be covered by gift funds). It should be specifically noted that gift funds are not acceptable on investment property transactions. Although a gift may be large enough to cover all of the funds needed for a transaction, if the LTV is greater than 80% and the borrower is purchasing either a second home or a 2-4 unit principal residence, the borrower is still required to contribute a minimum 5% contribution from their own funds.
For FNMA and FHLMC, gift funds must come from a relative. This can be through blood, marriage, adoption, or legal guardianship. Non-relatives can be used, but must share a familial relationship with the borrower. Examples include a domestic partner, those that are engaged to be married, a former relative, or a godparent. Family friends, a friend from high school, a borrower’s work colleague, etc. are all ineligible donors (wedding gifts from non-relatives are acceptable to use as an eligible source of funds, but those gifts must be deposited within 90 days of the wedding and a copy of the marriage certificate is required). Out of these approved donors listed above, the donor may also not have any affiliation with an interested party to the subject transaction (real estate agent, builder, etc.). If utilizing a USDA RD loan, a gift can be given by any uninterested third party as long as proper documentation has been met.
New as of September 7, 2022, FHLMC is expanding acceptable donors to non-relatives when the borrower is a first-time homebuyer purchasing a primary residence and gifts are related to a recent graduation. In this case, FHLMC requires evidence of graduation from an educational institution with the graduation date and verification of the gift funds in the borrower’s account. The gift funds are required to have been deposited within 90 days of graduation.
What is required for gift funds in terms of documentation? In every conventional loan file where there are gift funds being used, a gift letter is required. At a minimum, this letter should specify the amount of the gift, the date the gift was (or will be) transferred, state that the gift is not expected to be repaid, and list the donor’s name, address, phone number, and relationship to the borrower. If multiple gifts are being used from multiple family members, a gift letter is required for each separate gift. When there is a required minimum contribution of 5% (discussed above), it is also required that the donor certify that they have lived with the borrower for the past 12 months, will continue to live with them in the new residence, and provide documents that verify the shared residency between the donor and borrower. A driver’s license, shared bank statement, or bill can confirm the shared residency. In addition to this, USDA RD will require a bank statement from the donor that can prove sufficient funds for the gift.
For VA, FHA, or specific investor overlays, note that some requirements may be different than what is listed above. Please consult specific guidance or overlays for additional information. For assistance from The Commonwealth Group on contract processing, contract underwriting, contract quality control, or many additional mortgage services, please reach out to [email protected].